PREVIEW: July 28th-29th FOMC minutes due at 1900BST/1300CDT
- Markets looking for clarification for a September or December lift-off after the FOMC statement did not send any overt signals
-
Any comment that “some” or “many” members saw September as an appropriate time will keep next month on the table and likely result in curve
steepening and broad based USD strength
BACKGROUND
The FOMC meeting in July showed that the Fed are still moving closer to raising rates saying that they will look to begin their normalisation cycle once
they have observed “some further improvements” in the job market and are “reasonably confident” that inflation will reach its 2% objective
. Their decision to modify the wording in regards to the labor market to “some further” from their previous “further” emphasised their view that the job market is edging toward full capacity.
During the minutes release to the July meeting investors will once a
gain look for further communication as to when the FOMC will start to normalise rates - in particular, on the split between voting members of September
as an appropriate time to normalise rates.
Participants will also be looking for comments on the pace of rate hikes and whether the Fed could conduct two increases before the end of the year as per
the existing dot plot projections. The Fed has continually preached a policy of
data dependency and participants will pay close attention to the discussion on how close the US economy is to meeting the central bank’s criteria
for the first rate hike.
As is usually the case with FOMC minutes the significance of the report can be diminished given its dated nature allied to the fact that a number of data
points have been released since the actual meeting itself; these include GDP, Employment Cost Index, Nonfarm Payrolls, Unemployment, PPI and CPI. However,
with the keenly awaited September meeting fast approaching this may be one of the final communications from the Fed until that meeting with the exception
of the Jackson Hole symposium next week.
MARKET REACTION
The market reaction will very much depend on the communication with regards to the viability of a rate hike in September.
Any comment that “some” or “many” members saw September as an appropriate time will keep next month on the table and likely result in curve steepening
and broad based USD strength
. However, any hints that the bias is leaning toward putting off rate normalisation would likely see further flattening of the curve as markets push out
their expectation to further solidify expectations that December will be the new target for the Fed to lift rates
. As of the 18th of August, the CME Group FedWatch tool currently shows 30-Day Fed Funds futures pricing in a 36% probability of a rate rise
in September, 42% in October, and 67% in December.